Essay model answer - Determinants of demand for imports

This is a 20 mark answer. It could be asked as a 25 marker. You would add one more point to this essay to gain the extra marks.

Assess the main economic determinants of a country's demand for imports (20)

An import is a good or service that has been brought in from abroad. The money from the specific import will go back to the country it came from. Imports are apart of balance of payments, and if imports too high it can ultimately cause a trade deficit.

Income elasticity of demand plays a key role in determining the amount of imports a country will demand. People in the UK are experiencing a period of increasing disposable income, this means they will demand more imports-the richer people feel, the more imports they will buy. Imports are seen to be a of better quality or luxury goods when compared to domestic products, for example wine from France. This is because of the increased choice of products. UK consumers will purchase imports as they are exposed to readily available, higher quality products. Therefore a rise in income will likely result in increased imports.

However, income elasticity of demand may not be as significant. People may choose to save their money rather that purchase expensive imports. Due to the current state of the of the UK people wont have the confidence to 'splash' money around. It is more likely that people will save money, this could therefore decrease the demand of imports.

Comparative advantage is when a lone country as a lower opportunity costs. This means it is more efficient for a country to focus on producing what they have comparative advantage in, and import the good/services that they don't. For example the UK have comparative advantage in pharmaceuticals. This means that countries around the world would demand pharmaceuticals from the UK as they are nest at producing them. Therefore the demand for imports from the UK would increase, as countries were better off importing them rather than producing their own pharmaceuticals.

However, comparative advantage may not work in the long run unless they reinvest. For example, the UK used to have comparative advantage in ships, however they did not reinvest and lost this advantage. The demand for the product may decrease all together. The increasing discoveries of new technology means that the demand of products will fall in specific areas, and therefore imports will decrease.

Finally, countries may lack vital resources such as oil which will lead to an enormous increase in demand for imports. In the UK it impossible for them to produce enough oil to go round. Therefore, as it is an inelastic good, they have no choice but to import.

Overall, countries demand imports for several reasons. Imports on a global scale are increasing due to various factors such as a decrease in protectionist polices. The most significant detriment of a countries demand for imports is due to income elasticity demand, as it has allowed the number of imports demanded to increase rapidly.